Patent Puzzle, Inflation, and Internal Financial Constraint
MPRA Paper from University Library of Munich, Germany
Although Schumpeterian growth models typically predict that stronger patent protection enhances innovation-driven economic growth, the empirical evidence does not support this idea. We explore the unclear relationship at work by shedding light on the financing of R&D investment. Empirically, R&D-intensive firms preferentially rely on their internal cash flows rather than external funds. We develop a simple monetary Schumpeterian growth model in which R&D firms face an endogenous financing choice that is consistent with this evidence. In our model, the scale of R&D investment may be financially constrained by internal cash because external financing is costly. Our model shows that the relationship between patent protection and growth can be either N-shaped, inverted-U shaped, or positive depending on the inflation rate. Specifically, we find that the growth effect of the pro-patent policy is likely to be negative under a high inflation rate, while the growth effect is always positive under the Friedman rule.
Keywords: Innovation; Patent Protection; Inflation; Financing of R&D (search for similar items in EconPapers)
JEL-codes: E44 O31 O34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent, nep-fdg, nep-ipr, nep-mac, nep-mon and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:101937
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